Financial Advice in Canada can be categorized into three broad categories:
1. The Traditional Advice Model
2. Robo Advisors
3. Hybrid Advisors
Traditional Advice covers the wide spectrum of Advisors which most people are familiar with – these are people who typically offer both financial planning and investment management services. They might work at a bank, independent dealer or a boutique firm. Advisors who work in the traditional advice channel are registered with a securities regulator such as IIROC, the MFDA or a Provincial Securities Commission.
Robo Advisors offer low cost portfolio management services. Specifically, they offer retail investors a quick process to build an investment portfolio using a set of automated risk assessment tools. Based on the outcome of the assessment clients are provided with a recommended investment portfolio (usually made up of Exchange Traded Funds) which is automatically rebalanced over time.
Hybrid Advisors marry traditional financial planning services with the services of Robo Advisors.
The Hybrid Advice model is brand new and not well understood by either consumers or industry participants themselves.
As the name would suggest, Hybrid Advice combines human advice with the digital capabilities of a Robo Advisor.
Hybrid Advice is a generic term - within this model are important nuances between the services that are currently available.
The most important distinction among those who offer Hybrid Advice has to do with the level of service and the depth of the relationships on the human side of the equation.
Hybrid Advisors are either;
· Employees of Robo Advisors, or;
· Independent Advisors who partner with Robo Advisors.
Employee Hybrid Advisors
As Robo Advice industry matures these firms have come to understand that many of their customers are interested in more than just investment management. Customers want some level of financial advice as well. Several of these firms have responded to this demand by providing basic financial planning services.
This financial planning advice is delivered by a live human representative.
However this person isn’t likely to be a dedicated Advisor – someone you can call in a pinch if you need some information on your investments or something to do with your financial plan.
Instead this is an employee of the Robo Advisor, likely someone who is young, without much planning experience, and they may or may not have any planning credentials. You won’t really know who they are, or their qualifications. More importantly – aside from the ‘need to know’ basic facts about you and your circumstances – they won’t really know you either.
Hybrid Advice delivered by Robo Employees is attractive because it is almost always included in the already low investment management fees which run anywhere from 0.5% to 0.75%.
But you get what you pay for – don’t expect anything more than some very basic financial planning advice which certainly wouldn’t be suited to people with more complex financial, tax and estate planning needs.
Independent Professional Hybrid Advisors
Hybrid Advice delivered by Independent Advisors is the newest advice model.
Well they don’t really have a clear title that identifies who they are and what makes them different – so we’ll call them “Professional Hybrid Advisors”.
While their numbers are unknown, a safe guess would suggest there are somewhere between 750 to 1000 individuals in Canada working in the Hybrid Advice Model.
So… who are Professional Hybrid Advisors?
These Advisors are typically established, experience Advisors with an existing client base. In almost every case they have previously worked in the Traditional Advice Model.
They’ve decided that the way to deliver the greatest value to their clients is not by managing their investments; instead these advisors focus on your financial, retirement, estate and tax planning. They partner with Robo Advisors who are responsible for managing your money.
This doesn’t mean the Advisor is totally off the hook with regards to investment decisions.
Instead of managing money on a day to day basis, the Hybrid Advisor is involved investment process at a high level. For example, they would consult with the client to determine an appropriate investment strategy and monitor portfolio performance.
From the Advisors perspective there are several advantages to moving their practice to a Hybrid Model.
Not only does a partnership with a Robo Firm allow Advisors to off load investment management tasks – but also much of the administrative burden. Digital platforms provide a more streamlined account opening process, easier account transfers and more client friendly statements and reporting.
Reducing the administrative burden while lowering operational costs is something which benefits both the Advisor and the client.
Hybrid Models also provide Advisors with opportunity to drop their registration. Because they aren’t making investment recommendations they aren’t required to be registered with a regulator. This eliminates the compliance burden which allows Advisors to focus on their business and their clients.
How Are Professional Hybrid Advisors paid?
Compensation for Hybrid Advice is straightforward. They are paid a “referral fee” by the Robo Firm. This fee set as an annualized percentage of the money they manage for each client. This fee is determined by the Advisor (and negotiated with the client) and will usually be anywhere from 0.50% to 1% of total assets under management per year.
Total client fees are broken down into a few parts.
1. Management Fees charged by the Robo Advisor. Depending on the firm and how much money you are investing with them, the management fee will average around 0.50% per year.
2. Management Expense Ratio (MER) on Exchange Traded Funds (ETFs). Most Robo Advisors use ETFs to construct portfolios. MERs on ETFs are quite low – and might add 0.10% to 0.20% to annual management fees.
3. Advisor Referral Fee: As mentioned this fee is set by the Advisor and is usually charged monthly.
All in total fees for a Professional Hybrid Advisor will run a client anywhere from 1% to 1.5% annually.
This compares favorably to much of the industry – particularly Mutual Fund Advisors where total management fees are normally greater than 2% annually.
More importantly – your fees are 100% transparent.
Are there Advantages to Having a Professional Hybrid Advisor?
From a client perspective there may be several advantages to working with a Hybrid Advisor.
1. Transparent Fees – Your fees should be 100% transparent. This isn’t guaranteed – especially if your Advisor is also selling insurance products or investment products other than what is offered by the Robo Advisor.
2. Superior Investment Management – An automated, low cost investment solution, where your portfolio is automatically rebalanced on an ongoing basis. This is likely to lead to a better outcome than what most investors are offered.
3. A focus on where an Advisor can add meaningful value, namely: retirement, estate and tax planning as well as financial coaching.
4. Access to digital tools benefits both the Advisor and the client by providing a much more efficient and user friendly experience which the traditional Advice Model has been slow to adopt.
Hybrid Advice – Looking Ahead
As momentum shifts toward the rise of digital advice it is unlikely that investors will completely abandon human advice and guidance in certain situations.
A 2017 report by Accenture highlighted how investors feel about the importance of human led advice and technology, specifically:
· Digital tools – once considered a key differentiator – are now considered a basic requirement by the majority of investors.
· The majority of investors surveyed felt human advisors provided the best customized advice. Technology alone leaves investors with questions and uncertainty.
· The overall trend may be toward advice on a periodic or “as needed basis”. The majority of millennials for example question the value of a dedicated advisor, however do put “some” value on firms which provide access and communication with a dedicated advisor.